When planning retirement there are many things to consider. Your job may have a pension plan, you have to determine how much help your Social Security benefits will be, and you may have retirement savings or a 401(k). This is a popular option with many advantages.
What Is a 401(k)?
With all of the retirement plan options available, such as a Brightscope defined contribution plan, it can be difficult to choose the best one for you. First, it’s important to know what a 401(k) is. It is a plan offered by some employers for retirement savings. A portion of the employee’s paycheck is set aside in an investment account. This may be matched partially or completely by the employer. The employee gets to choose how they want the money invested. Mutual funds are the most popular and a very safe option. Upon retirement, the employee can draw from the account for living expenses.
The Two Types of 401(k)
There are two types of 401(k) and they work a little differently in terms of taxable income.
- Traditional 401(k) – In a traditional 401(k), deductions to the plan come out of the employee’s gross income. This reduces the taxable income by the amount taken from the salary. Taxes are not paid on this money until is it withdrawn
- Roth 401(k) – In a Roth 401(k), the money is taken from the employee’s net income, after taxes have been taken out. The money is not taxed later when it is withdrawn.
A 401(k) can be very helpful for retirement planning. Knowing the types and how they work can be helpful in planning for the future.